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Prepaid, but Not Prepared for Debit Card Fees

Buying a prepaid debit card these days is just about as easy as picking up a bottle of shampoo or a candy bar. Walk into a Wal-Mart or almost any major drugstore, and rows of plastic worth $25, $100 and even $500 beckon from kiosks alongside prepaid phone cards and gift cards for retailers.

“No Credit Check. Safer Than Cash. No Bank Account Needed,” says the Green Dot Visa Prepaid Card: Just pay at the register and the card is ready for A.T.M. withdrawals, store purchases and online shopping.

For many people who do not have bank accounts, or cannot get a credit card, the appeal is irresistible, making the reloadable cards among the consumer banking industry’s fastest-growing products. But their convenience comes with a catch: fees, often hidden in the fine print.

The MiCash Prepaid MasterCard docks cardholders a $9.95 activation fee. Like many competitors, it then charges numerous recurring fees, including $1.75 for each A.T.M. withdrawal, $1 for each A.T.M. balance inquiry, 50 cents for each purchase, $4 for monthly maintenance, $2 for inactivity after 60 days and $1 for a call to customer service.

The Millennium Advantage Prepaid MasterCard goes further, listing an application fee of up to $99. The Silver Prepaid MasterCard advertises that it does not charge for overdrafts as many debit cards do, but it gives itself the option of charging a $25 shortage fee if customers exceed their balance.

“It’s a very expensive way to bank,” said Jean Ann Fox, director of financial services at the Consumer Federation of America.

A cottage industry only 10 years ago, reloadable prepaid cards have tapped into the vast pool of about 80 million consumers who have little or no access to bank accounts. The market includes college students who do not want to carry around wads of cash and consumers who do not want to type their credit card number into the Internet.

More typically, it comprises low-income people and immigrants who have fewer financial options than other Americans. Often, they turn to these cards because they cannot open a bank account, or they become fed up with the costs of check-cashing stores or overdraft fees on checking accounts.

Industry officials say the cards are a good deal because users can avoid the fees charged on low-balance bank accounts and at check-cashing stores.

“If you look at these products today compared to even a checking account, many consumers have found that they can be far less expensive,” said Gary Palmer, chairman of the Network Branded Prepaid Card Association.

But even as the industry expands, many prepaid cards continue to charge fees — including for purchases and paying bills — that can quickly accumulate.

Like many workers, Tyrell Blocker, 20, of Brooklyn, could ill afford the surprise when he took such a card last week to a Pay-O-Matic Financial Services store in Manhattan after a bank turned him down for an account because he lacked one of two required pieces of identification. As soon as the cash from his paycheck landed on his card, he noticed fees accumulating. Mr. Blocker returned to Pay-O-Matic to complain and only then was provided a detailed list of more than two dozen fees, he said.

“I need every last dime I got; I’ve got a newborn,” Mr. Blocker said. A spokesman for Pay-O-Matic said the card was fairly new and the firm was working to make the fees more transparent.

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Tyrell Blocker of Brooklyn said that fees started to accumulate on his card as soon as the cash from his paycheck landed on it. He complained to Pay-O-Matic and only then was provided a detailed list of card fees.Credit
Brent McDonald/The New York Times

Little Regulatory Scrutiny

Because it is a relatively new industry, prepaid cards have not undergone the Congressional and regulatory scrutiny of credit and debit cards. In the spring, lawmakers restricted interest rate increases and hidden fees on credit cards, and regulators are now examining stricter rules on overdraft fees on checking accounts. Even gift cards, which expire when the money runs out, will soon be subject to new rules limiting monthly fees and expiration dates.

Congress has asked regulators to determine if prepaid cards warrant the same protections extended to debit and credit cards. The industry’s trade association says such measures are unnecessary and would make cards more expensive.

But consumer advocates say the lack of regulation means that prepaid card users can continue to be blindsided by hidden fees, and have few legal protections to recover their money if a card is lost or a charge disputed.

Mike Henry, who owns a small print shop in California, had not been able to recover $50 stuck on his Only 1 Visa prepaid card after it stopped working. He gave up after numerous calls to customer service — at 95 cents each — went unresolved. Only 1, meanwhile, continued to send daily updates of his balance as it was eaten away by monthly fees. His account was finally whittled to zero.

“For the last six months, I turn on my computer and check my e-mail and get slapped in the face,” he said.

Only 1 officials said they regretted his inconvenience and were refunding Mr. Henry’s money.

Among the beneficiaries of these cards are Visa, MasterCard and Discover, which receive about a nickel to 20 cents each time a credit or debit card emblazoned with their logo is swiped. While the companies do not disclose income from prepaid cards, their efforts to add tens of millions of users represents a potentially significant source of new revenue.

Financial firms that issue the cards are often little-known companies with names like Green Dot, NetSpend and AccountNow. Since they get money upfront from the consumer, there is relatively little risk with prepaid debit cards, compared with credit cards and other loan-making products.

Given the number of people who have little or no relationship with a bank, both in the United States and abroad, the financial industry is betting on a boom. In 2008, for instance, customers loaded about $8.7 billion onto prepaid cards, a 125 percent increase over the previous year, according to the Mercator Advisory Group. The industry is expected to balloon to $119 billion by 2012, Mercator predicts.

“Every year we’ve seen big growth,” said Steve Streit, the founder of Green Dot, now one of the largest reloadable prepaid card companies. “There’s a part of me that believes we are just at the entry ramp to growth right now.”

The cards are part of a larger universe of plastic that includes prepaid phone cards and gift cards, payroll cards and government benefit cards. Industry officials are particularly excited about the explosive growth from government agencies and companies as they replace paper checks with prepaid cards to save money. Social Security payments are now offered on prepaid cards to retirees without bank accounts, and many states do the same with welfare payments. Wal-Mart recently said it would pay employees only on prepaid cards if they did not have a bank account for direct deposit.

These fees tend to be lower than those on commercial prepaid cards. But critics question why there are any fees at all, particularly when the recipients do not have a choice.

“To me, it’s a terrible thing to give people their pay on a card that has fees on it,” said Linda Sherry, director of national priorities for Consumer Action.

Reloadable prepaid cards hardly existed a decade ago. Then, as credit cards surged and the Internet bubble lifted the economy, a handful of companies noticed an untapped market in teenagers who wanted to shop on the Internet, but were not eligible for credit cards. But it soon became clear that the larger market for prepaid cards was people who do not use banks and the uncreditworthy.

In the years since, dozens of companies and banks have latched on, some offering celebrity branding to lure customers. Johnny Cash, Usher, Carmen Electra and the football player Vince Young have all had their name attached to a prepaid card, and the hip-hop impresario Russell Simmons continues to back the RushCard, mainly to African-Americans, as a “better alternative” than banks and credit cards.

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But these efforts are not without controversy. Mr. Simmons, for example, has batted down repeated criticism that his card saps money from low-income users. His Pay-as-You-Go card has come under scrutiny for charging a $19.99 activation fee deducted from the cash first loaded onto the card; a $1 convenience fee for the first 10 purchases every month; and a fee of $1 for every bill paid with the card.

Industry officials say fees have been declining, especially after Wal-Mart this year trimmed fees on the MoneyCard Prepaid card it sells, which prompted several other issuers to cut prices too. They add that consumer complaints are rare and that surveys indicate the vast majority of customers like the cards.

An industry-sponsored study by Bretton Woods, a bank advisory firm, said that cards like Green Dot, Wal-Mart and NetSpend are cheaper than a checking account, whose annual cost can be as high as $353, assuming six overdraft charges, compared with $207 for a direct-deposit prepaid card.

Yet in many instances, even the lowest-fee prepaid cards can cost more if consumers are able to avoid bank overdraft fees. That should get easier after several large banks announced recently they would let customers decline overdraft protection.

While most major banks charge $10 or less a month for a low-balance checking account, a survey of two dozen prepaid cards released in August by the Consumers Union, the publisher of Consumer Reports, found that the cheapest, the Wal-Mart Money Card, cost $16.59 in the first month and $21.54 in the second.

By contrast, the most expensive card, the Millennium Advantage card, cost $115.05 in the first month, because of a $99 application fee, and $27.95 the second month, the survey, compiled by Michelle Jun, a lawyer for Consumers Union, showed.

And the actual fees charged can be confusing. A spokesman for the Millennium Advantage card said that while it lists the $99 fee, the company charges only up to $30. A spokesman for the Silver card said that it does not actually charge the $25 shortage fee shown in its fine print, and is working to remove it from company documents.

“How are consumers supposed to keep the fees straight if the companies can’t?” said Michael McCauley, a spokesman for Consumers Union.

In the meantime, bewildered by opaque terms and often dodgy customer service, many consumers are fending for themselves.

Damon Saxton, 34, said he had given up on prepaid cards and hoped to return to a bank, if they will have him. Mr. Saxton began using a prepaid card after being barred from getting a bank account for cashing a check from an eBay sale without realizing it was fake.

But Mr. Saxton, who lives in Florida, said that the two years he used his Vision Premier Prepaid Visa Card were marred by petty fees and horrible customer service.

Mr. Saxton said that when he punched the wrong code into an A.T.M., the bank charged him $2.95 for a declined A.T.M. transaction. When he called to complain, he said, they charged him an additional $1.95. When someone got hold of his card number and racked up several hundred dollars in shortage fees, Vision Premier covered the fees with Mr. Saxton’s tax return, which was directly deposited onto the card, he said.

A spokesman for the Vision Premier said Mr. Saxton’s experience was not the norm. The company eventually refunded the fees.

“I wasted countless hours dealing with this problem, not to mention the stress,” Mr. Saxton said. “I think the whole business is based around nickel and diming.”

The Card Game: This is the second in a series of articles about the changing nature of the consumer credit business, part of a joint reporting project with the PBS program “Frontline.”

A version of this article appears in print on October 6, 2009, on Page A1 of the New York edition with the headline: Prepaid, but Not Prepared for Debit Card Fees. Order Reprints|Today's Paper|Subscribe